Avon consolidates its focus in bid to counteract US downturn

Giving its outlook for the fourth quarter and the 2005 financial year, the company said it expects the action it is taking now will enable it to increase profits and in turn push up share profit by at least 10 per cent during the period 2005-2007.

That action will include the repositioning of its toy and gift segments in the US market, making a clearer division with its cosmetics activities.

Avon​ said that it would be able to increase its profit growth through a double-digit increase in its international sales during this same period. This initiative will include an extra $200 million of investment in its high growth markets - namely Central Europe and certain Latin American and Asian markets - during the period 2005-2007.

The news was not so good for the US market though. The company said that it expected sales for its US division, which currently accounts for 30 per cent of group sales, would drop by 5 per cent during the fourth quarter due to a poor performance from its Beyond Beauty range. Furthermore, it is predicting that during 2005 there will be another 'slight' drop in domestic sales, although sales are expected to start picking up again during the course of 2006.

Avon is expecting fourth quarter profits in the US division to be around $100 million, down from $133 million in the corresponding quarter of 2003. Likewise, profits for the quarter are expected to be up by around 35 per cent in Europe and in both Asia and Latin America profits are expected to grow by double digit figures.

Evincing this downward trend in the US, the company said that the number of active representatives would continue to fall during the fourth quarter, compared to the same period last year. Currently Avon has 4.4 million sales representatives worldwide, the number of which is seen as a determining factor in its performance, which relies largely on door-to-door direct selling.

The company said that logistics would also become a focus of attention in the future, which help up operating margins to 20 per by 2008. This will be supported by the implementation of an enterprise-wide resource planning (ERP) system that will up the efficiency of its global supply chain. Implementation of this system is expected to take place in the European market during the course of 2005, with other regions expected to follow suit during the course of 2006.

Andrea Jung, Avon's CEO said: "Over the next three years, we intend to further penetrate and expand in rapidly growing geographies in which our direct selling model excels. Our increased scale in the fast-growth and highly profitable developing international markets, combined with a repositioned US business, should enable us to generate continuing growth in sales and earnings as we evolve to the next generation of Avon's transformation."​

Analysts say that Avon's performance in the domestic market is causing investors to become nervous, and share values have fallen in response to the announcement. However, they also point out that overall the group's performance continues to be strong on account of its performance in the international markets.